Beijing goes on affordable-housing building spree

Commentary: Pouring concrete on a property bubble

HONG KONG (MarketWatch) — China’s leaders may have recognized that high property prices which make housing too expensive for many of its citizens is a problem. But is the answer to pour yet more concrete?

Last week, plans were revealed at the annual National Peoples Congress to embark on a massive building program spending 1.3 trillion yuan ($200 billion) to build 10 million homes in a year. That is almost as much as China’s huge stimulus program in 2009.

The hope is this will provide low-cost housing for those left behind by the speculative surge in residential property prices. In all, 36 million homes will be built in the next five years.

But have authorities identified the correct problem? Many believe the underlying issue is not a lack of supply, but rather inflated prices caused by a policy of overly loose monetary conditions amid a speculative mania.

Cleanup begins after quake in Japan

(1:37)

Residents in Japan are returning to their shattered neighborhoods and taking stock of the damage from Friday's devastating 9.0 magnitude earthquake.

A recurring observation across many cities in China is the telltale spectacle of unlit windows at night, revealing vast quantities of empty buildings. No one really knows quite how many, although a report ran last year that 64.5 million apartments could be uninhabited, according to records of nationwide electricity usage. This suggests China already has plenty apartments to go round, but they are being hoarded for speculation or are unsold.

The worry is more building will just add to resource misallocation across China’s economy as yet more money is diverted into bricks, mortar and concrete.

Some economists argue that if you examine the sheer size and amount of investment in mainland Chinese property, it illustrates that supply is not the problem. According to Wang Tao, an economist at UBS, the value of China’s urban housing inventory is estimated to be equivalent to 75% of the country’s gross domestic product in 2010. Further, if you use market prices of new residential housing in 2010, this figure would rise to 120%.

So far this year, property investment is continuing apace despite China’s recent interest-rate rises and property-cooling measures. Fixed-asset investment in real estate rose 24.9% in the first two months of this year to reach 1.74 trillion yuan, according to the National Bureau of Statistics.

Still, Beijing’s policy response is not without precedent. Unfortunately, the one that springs to mind is the Hong Kong government’s pledge shortly after the 1997 handover to build a target of 85,000 homes a year. This policy by then-chief-executive Tung Chee-hwa was similarly designed to address lack of affordable housing after various measures to stop property speculation were tried. It was subsequently blamed for negatively affecting sentiment and contributing to an even more prolonged slump in property prices which ended down 60%-70% from peak levels.

The risk is China’s new centrally directed building policy will have similar consequences. Rather than simply pouring more concrete, if authorities wanted to tackle the root problem, a better response would be to ensure more efficient use of its housing inventory. Notably in Taiwan last week, the government approved legislation described as a luxury-tax bill to impose up to a 15% tax on the sale of non-self-used properties. This at least should restrict speculative activity and means incentives are designed to favor end-users.

One complaint about mainland property investors in Hong Kong is they often do not even look for yield by renting out properties, thereby at least providing a supply of rental units to the market.

In the background remains the fundamental issue that money is still very cheap in China in an environment of inflation. Authorities have been reluctant to take the pain of higher interest rates, and even with recent interest-rate hikes, real interest rates are still negative with inflation running at 4.9% and deposit rates 3%. The incentive to invest in property remains strong when it is seen as an inflation hedge, despite various measures imposed, such as such as raising down payments.

At the same time, it is not a given all this new housing will be built. Beijing will provide just 500 billion yuan from central funds, and the rest is expected to come from local governments and buyers. It will also be a delicate balancing act to have low-cost housing somehow segregated so that it does not impact wider property-market pricing.

Perhaps a better solution would be for Beijing to keep its powder dry and use some of this budget to purchase the stock of empty housing blocks. For now, it is hard to disagree with the UBS economist Tao’s view: “China’s property bubble is the biggest macroeconomic risk in the next few years.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.